Commentary on Economics, Information and Human Action

NRG seeks capacity market for Texas

Joe Ragan, a VP at Power generation company NRG, recently opined in the Houston Chroniclein favor of a capacity market for the ERCOT power grid in Texas. A capacity market provides what you might call “being there” payments to generators, whether the generator’s power turns out to be demanded in the market or not.

I was struck by two things while reading the op-ed: first, no mention of the role of wind power in shaping prices and economic conditions for generation in Texas even though ERCOT has the highest wind penetration market-wide in the United States; and second, the way “prices” get invoked.

As any economics student knows, prices are the product of the interaction of supply and demand. In the op-ed, however, prices seem to be something driven by and driving the supply side of the market only. The demand side of the market has “needs” driven by the weather, but apparently not linked to the prices that consumers have to pay.

Admittedly, this way of thinking has 100+ years of tradition behind it in the electric power industry–that’s how it was done under the old cost-of-service, monopoly territory, regulated rate system in the electric power industry.

Texas has been trying something different, with more commercial risk to drive efficiency on the supply side, and potentially high price spikes to motivate an active and engaged consumer side of the market. A capacity market would kill the experiment before it has a chance to pay off.

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7 thoughts on “NRG seeks capacity market for Texas”

I am glad you wrote about this. Texas is a state with high use of “renewables”, particularly wind. Texas is also a state with lower electric rates than some others some of the time. The reason for the low rates is the high use of natural gas and coal for base load power but in the spring and fall it is the direct subsidy of 2.5 cents per KWH to wind producers which depresses electric rates. The subsidy driven, excessive addition of wind power has had an adverse effect on the future addition of more traditional baseload power and threatens the integrity of the the entire power generation grid in Texas. This is the context for Joe Ragan’s opinion. He figures if the wind generators get a generous feed-in subsidy, then he should too.

The wind generators produce most of their power in the spring and fall when the wind blows and demand is at a nadir. Because they receive a direct subsidy 2.5 cents for every KWH sold they can literally pay to have their electricity fed into the grid in the spring and fall and still make a profit. This kills the ability of baseload operators to cover costs because they also have to feed into the grid at the market rate, which is negative, due to the government subsidy to the wind operators.

So now, baseload operators are unwilling to invest in new infrastructure going forward because they can’t pay to feed their electricity into the grid in the spring and fall.

This is only a problem because of the federal subsidy of 2.5 cents per kilowatt hour. Without the subsidy, wind operators would not be able to pay to feed electricity to the grid and still make a profit.

We have two choices going forward. End the subsidies to wind operators and let them compete on an equal footing with traditional producers. Or, we can pile on even more subsidies and subsidize the traditional producers to make them competitive with the subsidized wind operators.

“potentially high price spikes to motivate an *active and engaged* consumer side of the market”

Therein lies the rub, the thing that pushes my hot button. I don’t know about anyone else, but my life is complicated enough already. I have neither the time or the inclination to engage in a complicated transaction at every flip of a light switch. Nor, alternatively, to slog through some interminable “setup” process based on a myriad of obtuse rules, meant to automate said complicated transactions, and needing to be re-done every time yet another self-serving politician re-futzes the rules – and with every light switch and circuit accessible to hackers.

After all, I’m far too busy – at, among other things, working to pay misanthropic governmental social experimenters working for crooked politicians to find clever ways to make every little thing ever more complicated, on the view that it is somehow immoral or indecent to just let people live their lives.

Oh, and if I lived in Texas, I would certainly have not the slightest interest in having the A/C cut off on the most dangerously hot day of the year, which is roughly what all this complicated rubbish boils down to. Just one hospital stay for heatstroke would blow away hundreds or thousands of times over my Big Savings from willfully failing to maintain the traditional reserve generating capacity. Plus, there’s nothing safe to do on such a day but indoor activities, virtually all of which have come to require electricity. There’s no passive coat you can don to ward off dangerous heat.

Nor, here in Wisconsin, am I interested in having the heat cut off on the dangerously coldest – and dark – day of the year. Not only is there some health risk, although passive coats exist that work against cold, but, without heat the pipes may freeze and burst, severely damaging the building. Even that would blow away many times over my Big Savings from failing to maintain reserves.

In other words, crooked meddling politicians and social experimenters aside, the existing model works fine: electricity is what’s there when one flips the switch to turn on the lights or whatever else, and what runs the heating controls that keep the pipes from bursting – and such reserves as are needed to make that happen are provided according to old-fashioned law. After all, normally, the lights and A/C are needed *now*, when it’s 115F outside – or the lights and heat are needed *now*, in the dark, when it’s -20F outside. That’s *now*; not six weeks from now when the fickle wind might be blowing again and the temperature might be much safer.

The real solution is to send the crooked politicians packing and back off on the force-feeding: end most of the application (not so much research) subsidies for forms of power that are currently not very useful due to their intermittency, and let the markets for them develop more organically.

Now, I must acknowledge, statist-minded European diplomats, serving governments that seem determined to destroy their own economies, may dislike such an approach. On the other hand, who on this side of the pond really needs give a stuff? Who needs to care about lookin’ good to Europeans? Oh, they might harangue our diplomats, but we can simply tell them to take their potty wailing straight to the Devil. After all, what can they possibly do? Stop exporting raw-milk cheese that’s illegal for us to import anyway?

Here, here. ERCOT needs no capacity market. If nothing else, we’d lose the rash of retail suppliers going belly up a week after the cap is hit. When the cap is $9,000/mwh that will probably fill up an entire Power Daily!

Perhaps part of the answer may lie in the rate structure. I have advocated for a demand charge for all customers that reflects the fixed costs of supplying transmission, distribution and generation capacity. Such costs are applicable to all customers whether they have solar on their house tops or are relying on a wind farm in some distant location. Such a charge would provide the proper signal for demand side management and for developing new generation. If one wants electricity at the flip of the switch, the fixed costs have to be paid. Generators will not stay in business if they cannot obtain a return on their fixed costs.